New York Markets After Hours

EA sinks on forecast, ‘Star Wars’ concerns

Selling in Electronic Arts is overdone, several brokers say

By

DanGallagher

SAN FRANCISCO (MarketWatch) — Shares of Electronic Arts Inc. sank to their lowest level of the past decade on Tuesday, after the videogame publisher issued a disappointing forecast and reported a sharp drop in the number of subscribers for its high-profile “Star Wars” multi-player game.

Tuesday’s drop left the shares down more than 31% since the first of the year — completely erasing their strong run last year. The stock was last trading down more than 4% at $14.49, bouncing after having touched a session low of $13.83.

The selling came after Redwood City, Calif.-based EA
EA, -1.35%
reported results for the fourth quarter ended March 31 late Monday. Adjusted earnings came in line with estimates, as strong sales of new releases like “Mass Effect 3” offset weakness in other categories.

But the company also noted that the number of active subscribers for “Star Wars: The Old Republic” fell 24%, to 1.3 million. The MMO title was launched in late December.

Moreover, EA issued a revenue forecast for fiscal 2013 that was below estimates, as the company also disclosed that it had moved a “major” title out of the year, without giving further details. Read full report on EA's results.

“In our view, investors will read the shift in revenue guidance as a flip-flop by management, increasing investor concerns that the company could lower full-year EPS guidance unexpectedly at some point in the future,” wrote Michael Pachter, analyst with of Wedbush Securities, in a note to clients.

In addition to a weaker-than-expected “Star Wars,” some analysts are worried about the company’s pipeline for the current year — and its comparisons with a relatively strong slate in the prior period. EA’s planned fall release in the key shooter category — “Medal of Honor 2” — is not expected to be as popular as “Battlefield 3” last year.

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Pachter believes the next sequel to “Dragon Age” is the title that was moved out of the year, as the company’s Bioware studio has its hands full with “Star Wars.”

However, many of the brokerages covering EA remain bullish, noting that the stock is now trading at around 10 times estimated earnings for the next year, excluding the company’s cash base.

“EA is cheap, and once it can find a catalyst it could be a very good stock,” wrote analyst Evan Wilson of Pacific Crest Securities.

‘A big if’

At Macquarie Capital, analyst Ben Schachter noted that EA has done a good job in transitioning its business to digital. The bad news about “Star Wars” as well as high estimates for the current fiscal year could improve sentiment, he said.

“The bottom line is that we remain believers in the potential for the digital transition to lead to higher margins and higher revenues for key brands,” he wrote. “If EA can execute (and that is a big if), the stock could bounce from current levels.” Schachter remains neutral on EA’s shares.

Doug Creutz of Cowen & Co. kept his rating on the shares at outperform, noting that EA expects earnings per share to grow by 30% in the current fiscal year — mostly on the strength of its growing digital business.

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